All About Crypto Wallets

Cryptocurrency use is growing significantly year over year. Currently, an estimated 300 million people worldwide have bought or used crypto. According to a report cited by Yahoo Finance, the number of crypto users worldwide may reach as high as 1 billion by the end of 2022.

With such an accelerating rate of adoption, stories of people losing their crypto has unfortunately also become more and more frequent in the news. It’s estimated that around 2-4 million bitcoin are already lost—-forever—due to people misplacing or deleting their private keys by accident. 

There’s an overwhelming need for crypto wallets that balance security with ease of user. Getting started in crypto can be confusing, let alone learning about wallet types.If you’re reading this as a novice crypto user looking to learn what a crypto wallet is or how to get your crypto wallet started, keep reading!

What is a crypto wallet?

We know the concept of a physical wallet that holds paper bills, metal coins, and cards. So, how does this concept apply to a natively digital asset such as a crypto asset?

Let’s break down how crypto is different from fiat.  A crypto asset is an entry on the blockchain that states a given address holds a certain amount of currency. For example, given a bitcoin address, anyone can check how much bitcoin is in that address, and in order to send a transaction from that address, one needs a specific and secret number, called a private key, to unlock the coins in that address.

A crypto wallet is simply a piece of software or a physical device that holds the private keys which are necessary for one to access the coins in a specific address or a set of addresses. 

Think of a blockchain as a huge bank vault with billions of safety deposit boxes, and a crypto wallet as a keychain that holds the keys to just the safety deposit boxes that belong to you.

Note that a crypto wallet does not hold the coins themselves; the coins themselves are on the blockchain, and a crypto wallet only holds the private keys that are needed to access them. Therefore, calling a crypto wallet a “wallet” is really a misnomer. A more accurate name would be a “keychain”. For the sake of simplicity and convention though, we will continue to refer to crypto wallets as wallets.

Modern crypto wallets are typically secured by what’s called a “seedphrase” or “mnemonic phrase” which is a series of 12 or 24 english words from a predetermined list, which will always generate the same set of private keys. The purpose of a seedphrase is to make it easy for a human to memorize or write down the private keys. As long as a user still has access to the seedphrase, even if the wallet device or app is lost, damaged, or destroyed, they can still regain access to their crypto by restoring their wallet on a new device using their seedphrase. 

Types of crypto wallets

Like the wallets you stuff your dollar bills and credit cards in, crypto wallets come in different styles, all of which fall under what are referred to as hot and cold wallets.

What is a hot wallet?

A hot wallet is a device, app, or account that stores one’s private keys and is connected to the internet. It is called “hot” because a hot wallet is optimized for frequent transactions or trades. A hot wallet is easier to use when moving crypto in or out since it’s already connected to the internet and can more easily access services (like trading platforms). 

Hot wallets are hosted, meaning either a third party keeps your crypto safe for you, like a physical bank, or you’re in charge of your own crypto (called “self-custody” or “non-custodial”).

The downside to hot wallets is that they’re generally considered to be less secure than other types of wallets since your private keys are on an internet connected device, which makes you vulnerable to cyber attacks or hacks, hence your keys would be susceptible to theft.

There are a few different types of hot wallets, including online crypto wallets, desktop crypto wallets, and mobile crypto wallets. Mobile crypto wallets are designed to run as an app on a mobile operating system like iOS or Android. Online wallets are web-based, and desktop crypto wallets are software programs installed directly on computers. 

Pros of hot wallets:

• Can work with multiple cryptocurrencies
• Easy to use and convenient 
• Good for users who frequently trade or purchase crypto
• Usually free to use

Cons of hot wallets:

• Less secure
• If using a hot wallet on a centralized exchange, you wouldn’t have access to your own private keys

If you’re the type of person who trades crypto frequently and don’t intend to hold crypto long-term, a hot wallet would be best for you.

What is a cold wallet?

A cold wallet stores crypto private keys on a device that is disconnected from the internet. This forms what’s called an “airgap” between the user’s private keys and the internet, making it impossible for an unauthorized party to steal the private keys by an over the air attack. 

The most common types of cold wallets are hardware crypto wallets and paper crypto wallets. A hardware wallet is a specialized device for storing private keys and often resembles a USB drive. 

The manufacturers of hardware wallets would often have software (called a “bridge”) that helps a user interface with the wallet. However, unlike a desktop wallet, the keys remain on the device and not on the computer that it’s connected to. Theoretically speaking, assuming the hardware wallet is designed properly, even if it’s plugged into a computer that’s infested with malware, the private keys should still be safe since the wallet doesn’t allow the private keys to leave the device itself.

Another type of cold wallet is called a paper wallet. A paper wallet is, as it sounds like, a piece of paper with printed QR codes of your private keys and public addresses that lead to your crypto transactions. Since all that is needed for a wallet is a place to store private keys, technically an electronic device is not even necessary and a piece of paper will do. However, electronic hardware wallets have software that makes them much easier to use than paper wallets. 

Pros of cold wallets:

• Very secure

Cons of cold wallets:

• Inconvenient for frequent transactions and payments
• Hardware wallets usually cost somewhere between $50 to $250 (CAD) 

If you’re a little more paranoid about cybersecurity but still want to invest in crypto, a cold wallet might be best for you.

Do you need a crypto wallet?

You might be wondering if you really need a crypto wallet. The short answer is no—if you want to rely exclusively on centralized exchanges, then it’s not necessary for you to have your own wallet in order to trade crypto.

Many crypto exchanges or crypto trading platforms have their own version of a wallet in which cryptocurrency can be stored. 

However, your needs can quickly change depending on how you plan to use your cryptocurrency. You might want to consider getting a crypto wallet if:

• You want control over your own crypto
• You want to access Defi or other services that your exchange or crypto trading platform doesn’t offer

If any of these scenarios match your needs, continue reading to learn how to get started creating a crypto wallet.

How to get a crypto wallet

If you’ve determined you want to proceed in creating a crypto wallet, you can do so in five simple steps:

1. Pick your crypto wallet type

Determine if your crypto would be best stored in a hot or cold wallet. If you prefer to work online, choose between an online, mobile, or desktop wallet. If you prefer to work offline, pick between a hardware or paper wallet.

2. Choose your wallet

Once you determine which type of wallet, select the wallet software or company you’d like to work with. Each company varies in what features they offer.

Different blockchains might have different wallets that you’re required to use. For example, Metamask is a popular browser extension wallet that works with Ethereum and Ethereum-compatible blockchains (also known as EVM-compatible chains). 

Whichever brand of wallet you choose, you’ll then need to install the software onto your computer or mobile device. Hardware wallets usually require a piece of software called a “bridge” (which should be downloadable from the manufacturer’s website) to function, whereas software wallets come in the form of a mobile app, desktop app, or browser extension.

3. Write down your seedphrase (non-custodial wallets only)

Modern crypto wallets will assign the user a seedphrase during setup.While you don’t necessarily need to memorize it, you do want to write it down and keep it in a secure location. It’s recommended as well that you make more than one copy of the seedphrase and store the copies in different geographical locations so that you don’t lose the seedphrase due to a natural disaster such as a fire or flood. If you forget or lose this phrase, you will lose access to your crypto forever. 

4. Set up your account

Next, you’ll set up your account. If you choose a custodial option such as setting up an account on a centralized exchange, you might need to provide personal details, known as “know your customer (KYC)” info. Non-custodial wallets don’t require any personal info, just follow the onscreen instructions.

5. Deposit your cryptocurrency

Finally, your crypto wallet is ready for use. Transfer any funds that you already have into your new wallet. Once you click “receive”, the wallet should provide you with an address that has been generated for you where you can receive crypto to your new wallet. 

How to pick the best crypto wallet for you

As mentioned above, crypto wallet companies vary in what they offer. Let’s go over what to look for and how to pick the best crypto wallet for you.

• Compatible cryptocurrencies: Perhaps the most important feature is which crypto(s) the wallet can hold.
• Staking/lending rates: Some crypto lets you stake the crypto in exchange for additional crypto as a reward. You can also choose to lend out the crypto using a Defi service such as Aave. In order to access Defi services, a non-custodial wallet is required. Otherwise, some crypto exchanges or crypto trading platforms offer rewards if you allow them to stake your coins on your behalf. 
• Security features: Cold wallets are generally perceived as more secure than hot wallets, but that’s not to say security measures aren’t put in place to protect the safety of hot wallets.
• Insurance protection: Some hosted/custodial wallets might include a degree of insurance on the stored crypto. This would cover losses from theft and cybersecurity breaches. Otherwise, you can opt to insure your crypto yourself.

How to keep your crypto wallet safe

As a great philosopher once said, “with great power comes great responsibility.” When one takes on the responsibility of self-custodying crypto, they effectively become their own bank. As such, the crypto holder must exercise extreme caution in terms of their cybersecurity. Here are some tips to keeping your crypto secure:

• Don’t share your seedphrase with anyone.
• Don’t store your seedphrase online in a cloud server such as Google Drive or in the form of a digital file. Use paper and pen to write down the seedphrase. This ensures that any attacker would need physical access to the piece of paper in order to steal your crypto.
• Don’t publicize how much crypto you have, since this can make you a target for cyberattacks and physical threats. 
• When accessing a hot wallet, use a secure internet connection. Avoid using public Wi-Fi, especially for mobile wallets, and use a VPN for added privacy. 
• Regularly check your device for any suspicious activity or intrusions. If you notice anything suspicious, transfer your crypto to a new wallet. Antivirus software is also recommended.
• Don’t fall for phishing scams, like ads that seem too good to be true or emails with unknown links.
• Change your passwords frequently, and do not use the same password more than once. Using a password manager software is highly recommended.
• Store your crypto in at least two wallets, so you don’t lose all your crypto if there is an attack. Using a combination of a hot and a cold wallet is a good idea. 

With the recent rise in cryptocurrency use, we’ve seen increased crypto security breaches. If you’re purchasing or trading crypto, it might be wise to take a few extra steps to protect yourself and your money.

If you’re just getting started with cryptocurrency, you should now know how to get a crypto wallet. If you’re looking to buy crypto in Canada, check out Newton. Newton is a Canadian crypto trading platform where users can buy and sell many types of cryptocurrencies. If you already have a crypto wallet, you can also switch to the platform and transfer crypto to Newton.

Sources: Exploding Topics | Game of Life | Business Insider | Time | Wired

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